Hong Kong vis-a-vis the world – a mixed picture

Whilst the global economy recoils, Hong Kong remains unaffected; the question is how long for?

The very nature of the global economy ensures that all emerging and more mature economies are intrinsically linked. As a result, the relative strengths and weaknesses of individual countries can inevitably have an effect on near neighbours as well as complete regions on the other side of the globe.

No further proof of this principle is needed than the dramatic global crisis of a few years ago, which for many economies is still having an ongoing impact and for some countries, such as Greece and Portugal, these effects continue to be severe.

Hong Kong’s Position
As Hong Kong is a very open economy, with excellent trading relationships with for example North America, Europe and the Asia Pacific countries, it could be argued that we are particularly vulnerable to any changes in the global financial and trade climate, this was borne out by the drop in export figures at the end of 2012. However, current forecasts still suggest that Hong Kong will grow by 3.4% during 2012, while many other economies are facing significant downturns in their fortunes.

It’s true that our dependency on both international trade and financial transactions, does create some sensitivity to external shocks and the 2012 forecast is around 1.5% down on 2011 as a result of slower export growth. However, our economy is well supported by private consumption resulting from international and Chinese tourists, robust wage growth and a strong labour market.

Consumption and demand, however, also present some issues. As we have extremely close links with China, which is the source of most of Hong Kong’s food products, the global increase in food prices has been the main driver of inflation, which in 2011 stood at 5.3%. Some of the inflationary pressure has also been created by the increase in real estate prices, which has leapt by 60% since 2009. While government measures to cool the property market are likely to reduce inflation to around 4%, food inflation imported from China is likely to remain a problem, as is the impact of increasing rent levels and property prices, which combined are expected to keep inflation high.

The link between the HK and US dollar enables us to track the US Federal Reserve’s monetary policy. Interestingly, the US is also expected to be the best performing Western economy in 2012 with a forecast growth of 2.2%, but this could improve further if unemployment can be meaningfully reduced.

Future Influences
So, for the moment, at least Hong Kong appears to be in a fairly stable position, but what external influences can we expect to be subjected to in the future due to global market changes?

Overall, the global economy appears to be slowing, with a growth rate of 2.6% expected during 2012. While this is only a reduction of 0.3% on 2011, it’s almost 1.5% down on 2010. It’s also clear that there is a two-speed growth pattern, where emerging markets are growing at a much higher rate than more advanced and mature economies. Currently, emerging markets are on average expected to reach growth of between 4 - 5%, while the more advanced economies are closer to 1 - 2% growth (with Europe expected to contract by 0 – 0.5%).

China continues to be a star performer in terms of GDP growth and is likely to grow by around 8% during the next 12 months, which is significant by any standards and spectacular compared to most Western economies, where the best performing country is likely to be the US.

India is also expected to increase by around 7%, although this is 2% down from 2011, while the other key developing markets of Russia and Brazil are forecast to grow by 3 - 4 %.

However, the Eurozone is expected to fall into a recession and although it will be fairly muted there will be some fairly large contractions of economies in countries such as Portugal & Greece with conservative estimates predicting contractions of 3 - 4%.

The Eurozone is one of two major sources of uncertainty for 2012 and 2013, due to its ongoing debt crisis. The other is the rising oil price exacerbated by continued political tensions in the Middle East.

As the Eurozone countries are struggling with high debt levels, governments are under pressure to reduce debt. This has lead to higher unemployment rates and austerity measures which in turn have affected consumer confidence and consumption and lead to households also trying to reduce their own debts, further worsening the fiscal position.

Signs of Stability
Even so, there are definite signs of stability in the financial markets, since the European Central Bank (ECB) intervened by providing the banks with a large amount of liquidity at very low rates of interest. In December 2011, this figure was EUR489 billion and this process was repeated at the end of February 2012 with a further injection of EUR530 billion.

Political tensions in the Middle East present a particular concern to the global economy as it could stimulate further increases in the already inflated oil prices being experienced. Any oil price rises will further depress consumption levels in the advanced economies, which are already under pressure due to the austerity measures already implemented by the various governments.

Further increases would clearly present more issues, although the International Energy Agency has already demonstrated that it has the capability to can help mitigate the effects of oil price rises, when in June 2011 they intervened in the market quite successfully. Saudi Arabia has also announced it will increase production to try to moderate the price. However, the real concern is if military action is required in the Middle East, which would have a significant detrimental effect on the world economy.

Hong Kong clearly has a range of unique strengths and characteristics that have helped us maintain our robust position in the global market. One of those key strengths has been the ability to adapt to change and while there continues to be significant unrest and instability in key parts of the global economy, it’s clear that this ability will continue to be tested during 2012.